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Consumer Law Reform Bill - now a lot closer to Australia

Amendments proposed by the Commerce Committee will bring the Consumer Law Reform Bill much closer to the Australian model.

Most of the changes improve the Bill. But the new general prohibition on unfair contract terms in standard form contracts may not be so warmly received by business.

Comprehensive reform

The Bill will bring significant change to six key consumer statutes, as well as repealing another four statutes and incorporating them into an amended and extended Fair Trading Act and a new Auctioneers Act.

As we said in our commentaries on earlier stages of the reform process, this is chunky reform that will touch on a broad range of businesses.

Unfair contract terms

As amended by the Commerce Committee (the Committee), the Bill now contains a general prohibition on including, relying on, or enforcing unfair contract terms in standard form consumer contracts.

An “unfair contract term” is one which is declared by the courts to be unfair. Only the Commerce Commission may apply to the courts for such a declaration.

A term may be declared unfair by the court:

where the term is in a standard form consumer contract

if the term does not go to the main subject matter of the contract or the upfront price payable and is not a term permitted by any other law, and

where the term is unfair.

Relevant factors for the courts in determining this question will be whether the term:

is transparent

creates a significant imbalance in rights and obligations under the contract

is not reasonably necessary to protect the legitimate interests of the party advantaged, and

would cause financial or non-financial detriment to a party.

A grey list (of innumerable shades)

Consistent with the approach in Australia and the UK, a “grey list” will be inserted into the new Fair Trading Act, specifying terms which may be declared unfair in the circumstances.

These include:

a right for only one party to terminate the contract

a right for only one party to vary the terms of the contract

where only one party can renew a contract

where a party can vary the price without giving the other party the right to terminate, and

a right to unilaterally vary the characteristics of the goods or services supplied.

All of these terms are common in standard form contracts - often with good commercial reason. Their inclusion on the grey list does not deem them always to be unfair but creates an implication that they sometimes (often?) will be.

Although the power to request a declaration of unfairness is reserved to the Commerce Commission, the scope for red tape and unnecessary barriers to business efficiency looms large.

The lack of reported case law from the UK (which has had similar provisions for over 10 years) and from Australia leaves New Zealand businesses in an uncertain position as to just how big and how red the metaphorical “red hand” will need to be (if effective at all).

The extent to which standard form contracts will need to be changed is unclear and consumers are likely to bear some of the resulting compliance costs.

Is the prohibition needed?

According to a number of submissions on the Ministry of Consumer Affairs’ earlier consultation paper, no. At least, not without evidence that existing consumer laws are inadequate to protect consumers.

And the portfolio holder when the consumer law reform package went to Cabinet, ACT MP John Boscowan, recommended that both unfair contract terms and unconscionability be excluded from the Bill. The delay would allow New Zealand to see how Australia was tracking before imposing changes likely to raise costs on businesses already struggling with flat economic conditions.

But a later Minister of Consumer Affairs, National’s Chris Tremain, asked the Committee to reconsider these decisions in light of the trans-Tasman harmonisation agenda.

Looking more like our Aussie cousins every day

The Committee’s decision to include a prohibition on unfair contract terms is one of two changes which bring the Bill closer to the Australian legislation. The other is the imposition of bigger fines for breach of the Fair Trading Act. These are to rise from $60,000 to $200,000 for individuals and from $200,000 to $600,000 for bodies corporate.

Sensibly, the Committee has recommended a wait and see approach to unconscionable conduct, citing the Australian’s “technical problems” with implementation.

New delivery guarantee

The Committee has delivered an elegant solution to the problem of consumer redress for goods in transit: a new guarantee in the Consumer Guarantees Act.

Rather than imposing the Consumer Guarantees Act on carriers contracted by the supplier as was originally proposed but criticised in submissions, the new amendment requires suppliers who are responsible for delivering or arranging the delivery of goods to a consumer to guarantee that the goods will be received within the time agreed or otherwise within a reasonable time.

The existing guarantee of acceptable quality now applies from the time the consumer actually receives the goods.

The only change now made to the Carriage of Goods Act is to increase to $2,000 the maximum liability a carrier has for each unit of goods. The cap was last set in 1986 so the review is timely.

Clarifying how the Bill will work

The Committee has recommended a raft of amendments clarifying the application of the Bill, the majority of which align the new law with existing law or soften the sharper edges of the first draft. These include:

confirming it is unnecessary to substantiate representations that a reasonable person would not expect to be substantiated (or preserving “puffery” in advertising)

removing the supply of gas and electricity from the scope of the unsolicited goods and services provisions

excluding renewal agreements from the uninvited direct sales regime, and

consolidating the Credit Contracts and Consumer Finance Act disclosure and cooling off periods with the uninvited direct sales provisions.

How can you prepare?

All signs point to the Bill being passed early next year. So what should you be thinking of in the meantime?

Consider reviewing your standard form contracts to ensure that any potentially unfair contract terms are clearly and obviously expressed and are justifiable in the circumstances.

Contracting out of the Fair Trading Act will require careful drafting in business-to-business agreements where the counterparty is a small business or sole trader. Under the Bill, parties in trade will now be able to contract out of some provisions in the Act (including s9 (misleading and deceptive conduct) and the new unsubstantiated representation provision) but only if it is fair and reasonable to do so.

You should ensure you have all your substantiation ducks in a row before going to market with representations – complying with applicable industry standards or codes will be helpful but not determinative if you haven’t taken any further steps to verify the representations.

You must expressly require consumers to make unwanted unsolicited goods available for collection if the consumer does not purchase the goods and you want them back.

If you sell your goods on Trade Me or other internet auction sites, you will need to identify yourself as a trader.

If you allow consumers to buy “extended warranties” for goods or services you supply then you must provide the consumer with a summarised comparison between the Consumer Guarantees Act guarantees and the protections offered by the extended warranty (as well as a general summary of the consumer’s rights under the Consumer Guarantees Act).

If you sell goods on layby, you will need to meet new disclosure requirements (including on the face of your contracts) and you should revisit your cancellation charges.

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